Unformatted text preview: operating
costs and the profitability associated with various levels of sales.
operating breakeven point
The level of sales necessary to
cover all operating costs; the
point at which EBIT $0. Breakeven analysis, sometimes called cost-volume-profit analysis, is used by the
firm (1) to determine the level of operations necessary to cover all operating costs
and (2) to evaluate the profitability associated with various levels of sales. The
firm’s operating breakeven point is the level of sales necessary to cover all operating costs. At that point, earnings before interest and taxes equals $0.1
The first step in finding the operating breakeven point is to divide the cost of
goods sold and operating expenses into fixed and variable operating costs. Fixed
costs are a function of time, not sales volume, and are typically contractual; rent,
for example, is a fixed cost. Variable costs vary directly with sales and are a function of volume, not time; shipping costs, for example, are a variable cost.2 The Algebraic Approach
Using the following variables, we ca...
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